In a report released yesterday (Thursday), Standard & Poor's said it believes the preponderance of Canadian oil and gas speculative-grade exploration and production (E&P) companies in the 'CCC' category has caused more investors to focus on potential recoveries. "Based on our review, we expect very high recovery prospects on all but one of the secured debt issues from the Canadian E&P companies we rate, corresponding to a '1' recovery rating," said S&P's credit analyst Jarrett Bilous in the report, entitled, 'Canada's Oil And Gas Exploration And Production Companies Have Strong Recovery Prospects For Secured Debt.'
According to S&P, recovery prospects are among the most favorable for debt instruments from lower-rated issuers, particularly those in the 'CCC' category, which is largely a function of their current debt structures and the value ascribed to reserves and resources that are not currently generating cash flow. S&P says although the data available on actual defaults are limited, it believes that the few Canadian E&P defaults in the past few years anecdotally support its recovery expectations.
S&P notes it has downgraded several E&Ps in the past year, generally due to production delays and weakened liquidity, and now rate 50% of the group 'B-' or lower. It says although the outlook for the sector has improved recently, it believes weaker-than-expected oil and gas prices or cost overruns related to growth projects could lead to an elevated risk of default for some issuers in the next 24 months.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
